FLEX LNG Ltd. (FLNG) Earnings Call Transcript & Summary

[Audio Gap] Both according to schedule and budget. During Q2, we will do another two dockings, so in total, three dry dockings for Q2, and this result in revenues for this quarter being guided at $85 million to $90 million. Once we have completed the dry docking program in June, our quarterly revenues will pick up in Q3 and Q4 with quarterly revenues of around $90 million to $100 million for these two quarters. So we are also reaffirming our revenue guidance of $370 million for the year, which should translate into an expected adjusted EBITDA of around $290 million to $295 million. So with who has a strong financial position and minimum 57 years of contractual backlog. Our Board has decided to once again pay out our quarterly ordinary dividend of $0.75 per share. During the last 12 months, we have thus paid out $3.75 per share in dividends, and this has given our investors an attractive yield of around 11%. So that's the highlight. Let's continue. So as I mentioned, we are reaffirming our revenue guidance of $370 million for the full year 2023. As you can see here in the graph, Q1 revenues this year was significantly stronger than last year as we had limited our spot exposure to one ship on variable higher time charter and actually spot market was pretty firm during Q1. For Q2, as I mentioned, we have three ships which will be doing dry docking during this quarter, and Q2 is also usually the softer spot market and this will affect the one ship we have on variable TC. Once we have done with June and getting into Q3 and Q4, all these [indiscernible] ships will be in operations. And usually, we will see the seasonal uptick in charter rates during Q3 and Q4, which is also evident from the forward prices, and thus revenues will grow to closer to $100 million for those quarters. So as I mentioned, dry docking, we have been doing our first dry docking, the two first ships, Flex Enterprise and endeavor was delivered early 2018, and I will now do for the 5-year special survey. Flex Enterprise carried out this in March, while a sister ships, Flex Endeavor carried out a 5-year special docking in April, both in Singapore. In our last presentation, we guided that in total, these four dry dockings would take out 80 to 90 days of operations of 20 to 22.5 days. On average, we have managed to do this within 18 days. So we are slightly below time, and we asked also on the low side of the budget. CapEx in total for each ship, $4.5 million versus guided $4.5 billion to $5 million. So in Q2, as I mentioned, Ranger and Rainbow will also be docked and these are to be completed within June and the ships will then be in operation for the full Q3 and Q4. So as I mentioned, high contract coverage, 57 years of minimum contractual backlog. This slide is the same as we had in our Q4 presentation. During last year, we did extend the contractual backlog on several ships, as you can see here, with rainbow being an extended 10 years endeavor vigilant amber, enterprise and ranger. All these ships were extended for longer durations. And the first fully open ships we have today is FlexRanger in early parts of 2027 and Flex Constellation middle 2027 if the charter is electing to extend her for the 3 years, which they have an option to do. So I think in terms of these durations, we have a good coverage now. In near term, when export growth is to be expected to be muted, and then we have open ships from 2027 once a lot of new LNG is coming on stream and where we are also competing against new buildings at very high prices, as I will come back to in the market section of the presentation. And once again, our dividend decision factors. As you can see here, for this quarter, we are paying out the $0.75 of ordinary dividend per share. We have paid out 2 special dividends the last year, $0.50 for Q2, $0.25 for Q4. So in total, the last 12 months, we have paid out $3.75 of dividend, which gives a yield of 11%, 12% depending on where the share price is. So we think this should give our investors an attractive yield. All the parameters here are green. We have good earnings. Market outlook is good. We have this big contractual coverage. Liquidity at $475 million is super strong, and then we don't really have any debt maturities before 2028 at the earliest. Other considerations right now, I think most people are a bit focused on the aggressive Fed ramping up interest rate on the short-term side, where we do have a very inverted yield curve, and Knut will discuss a bit what kind of opportunities this has given us in the swap market. So with that, Knut, I hand it over to you, too. Thank you.

Thank you, Oystein. And as already mentioned, revenues for the quarter came in at $92.5 million. That gives us a time charter earnings average for the fleet of -- close to 80,200. OpEx, another strong quarter where we maintained OpEx control. where we have OpEx per day of 13,400. If we look more into the details. On the revenues, we have $5.5 million lower than last quarter. And that is driven by lower seasonal earnings on the variable hire contract and the off-hire days related to dry docking of the Flex Enterprise. Then we have some more noncash item on the income statement. The net loss on derivatives is $2.8 million. As you can see in the notes on the side, it's $7.8 million in unrealized mark-to-market loss from the derivatives. And then we have realized gains of $5 million from the swap portfolio, which is sort of our carry cost. With the completion of the balance sheet optimization program, we have exit cost of our debt. It's $8.8 million of write-off of debt issuance costs and then a termination fee of $1.4 million. That gives us a net income for the quarter of $16.5 million or earnings per share of $0.31. Adjusted for the noncash items, we have adjusted net income of $35.2 million and then resulting in adjusted earnings per share of $0.66 per share. So let's have a look at the details on the adjustments that we have made to arrive at the adjusted net income. If we look at the quarter-on-quarter differences on the net income, operating income is $6 million lower driven by the off-hire in connection with the dry docking of Flex Enterprise and the seasonal lower revenues under the variable higher contract for the Flex Artemis. Quarter-on-quarter, adaptation cost is $8.5 million, which is basically driven by the completion of the refinancing under the balance sheet optimization program. And then derivatives where we had the mark-to-market loss were here on a quarter-on-quarter basis, $7.7 million. With the smaller order effects, we arrive at a net income of $16.5 million. And when we then reconcile to adjusted net income, we add back the noncash items, which are the debt issuance cost write-off in total, together with the termination fee of $10.2 million. And then we have the unrealized market loss on the derivatives of $7.9 million, and then a smaller FX effect on our NOK portfolio. So in total, we adjust them back and arrive at an adjusted net income of $35.2 million. The balance sheet remains robust and clean with an all-time high cash position of $475 million, and we have an equity of $871 million. That gives us an equity ratio of 31%. If we look at the cash movements for the quarter, we increased the cash balance by $143 million, which is mainly driven by the completion of the balance sheet optimization program, where we have a net proceed of $196 million. And then net of the dividends paid last quarter of $54 million, we end up with an all-time high of $475 million. During the quarter, we have been active with our hedging portfolio. We have utilized the market when the interest rates have been high, to lock in the market value on some of our shops. Here, we have -- for those who recall, we had a 2.5 years, $181 million swap at -- where we are paying fixed 0.9%. When the market rate was high at here at 4.8%, we locked in that market value by doing a so-called mirror swap, where we will receive 4.8% fixed and pay the 0.9% to the bank. And that locks in $15 million of market value, which will be distributed back to us over the remaining period of that swap. We have also increased our hedging portfolio when the short-term interest rates dropped. In total, we increased with $260 million. And then we also added $50 million of 10-year spot. That gives us a total shop portfolio of $820 million, and as you see at very attractive rates. And in combination with the fixed rate elements of our leases of in total here, $205 million, we have a net hedge ratio of 62% and then remaining there around 60% to 65% for the coming quarters. So this is net of the $400 million RCF capacity we have. So by increasing the RCF capacity, we have also effectively increased our hedge ratio. So if we look at our financings, we completed the refinancing exercise last quarter with in total 6 vessels. That gives us now a debt funding portfolio where about 50% are long-term leases. And then $441 million of amortized term loans. And then we have the RCF of $400 million, which is bullet for the full tenure of the loans. And by that, we have pushed out the debt maturity profile. So as already mentioned by ASTM. First maturity is in 2028. And if we utilize an extension option at no cost for two of our leases. The latest one are then to be refinanced in 2035. So with that, I hand it back to Oystein.

Thank you, Knut. Okay. Let's have a look at the market. LNG export change in the first 4 months of the year, the period January to end of April, we saw about 5% growth in the market. And for the first time in a long time, actually, the biggest driver was North America because of the outage on the Freeport export terminal in the U.S. So the growth came from Qatar and Australia, the two big other players in the LNG export market and then actually Norway as well where we had the Hammerfest plant running now for the full quarter. Other countries contributed by about 2.5 million tonnes. On the import side, we do see the same trend we saw last year, where Europe is really gobbling up spot cargoes in order to replace the lost volumes from Russian pipeline gas. So -- and in Asia, it's been a bit slow start for China. Growth was flat during January and February. And then we did see that growth in the Chinese market started to fire up from March and onwards as they have been lessing the -- or basically scrapping the COVID policies they have had in place for some time now. If we look at the gas prices, it's been a very volatile ride last -- during the summer of COVID, European gas prices was as low as $1 per million BTU or translating into, let's call it, $6 per barrel of oil. After the Russian invasion of Ukraine, really, we saw a big rally in global LNG prices where Europe bought up a lot of spot cargoes. And we saw a peak of European gas prices at about $100. So we had a rent from $1 to $100 on the gas prices, this equates to about $600 per million for a barrel of oil. But now we have had a big slump in gas prices. We have had a mild winter here in Europe, and we have also seen the high prices have really incentivized people to cut down consumption and prices have no balance down to around $10, $11 per million BTU. Well actually -- LNG becomes competitive towards oil. Basically, we are now being traded at, let's call it, $60 per barrel of oil equivalent, and that is also feeding up demand from Asia, where we have seen more interest now to buy LNG in the spot market, as prices have come down. Henry Hub is basically flatlined. It's also been quite volatile, but now the prices have really come down in America, which means that it's still with $10, $11 for the spot prices. It's immensely profitable to sell these cargoes into the global market from the U.S. market. So in terms of America, we do see here the growth in exports. We had in -- during COVID, of course, we had a lot of voluntary cancellations. We had some cancellation during the big [freeze] in February 2021. And now last summer, when you had the explosion at the Freeport terminal in U.S., we have had significant downtime on the plant. It's now bounced back. But in total, 128 cargoes assumed by S&P Global that has been canceled or 9.5 million tonnes, but now exports are ramping up again. And we do see and expect that U.S. will become the biggest export of LNG in 2023 with pretty healthy growth, 14% according to EIA for the year. The other big player in the LNG market is, of course, China. So China became the biggest importer in 2021, so passing Japan at about 80 million tonnes, equivalent of imports, which is basically the production of U.S. last year. So far, we -- this is something we follow closely to see how the reopening of China is affecting demand. And I guess it's a big million dollar question for most investors these days. We saw flat growth in January and February, as I mentioned, but then we saw LNG demand picking up March and April, which have on average, 17% growth for those 2 months. So it's a bit too early to conclude, but there are some positive sentiments towards Chinese imports and especially when prices are at these kind of levels. EIA and energy aspect expects Chinese LNG demand to grow 10%, 15% this year, which will then result in China going from about 64 million tonnes of imports last year to about 70 million tonnes, but this is still 10 million tonnes below the imports of 2021. So we do expect to see continued growth of the Chinese market and the Chinese buyers are signing up to a lot of [SPAs]. China has contracted LNG volumes of around 70 million tonnes, but they are big buyers of new volumes as well. So the story about Chinese LNG import growth is far from over. As I mentioned, European gas market has had a lot of focus with the situation in Ukraine and with the Russian pipeline gas flows tapering off. We have in Europe this year, been in Cadillac. It's been a very mild winter. And this, together with the high prices have resulted in a lot less gas demand in Europe which have then resulted in storage levels, keeping up at pretty good level. We have seen storage levels above historical range. The injection season now is a bit slow. So we are getting into the customary range for development of the gas storage level. So the big question this year is how strong will the import demand be from Asia, how fields will competition be in terms of prices will Europe then be able to get these inventories levels up to a satisfactory level before winter. And as I mentioned, again, the drivers there in the market is the competition between Asian and European Gas demand. Let's see spot rates or the freight market, we are not really that exposed to the freight -- spot freight market any longer. 12 or [indiscernible] ships are on long-term charters with a fixed rate. We have one ship, which has been on a variable higher TC or which is on our variable higher TC [indiscernible] Q1, pretty good levels here. You can see on the light blue line on the left-hand side that the market during Q1 was pretty good, but has followed the seasonal normal usually rates come down to earth during the spin. Right now, we are basically on our average level for the last couple of years. And then this dotted line is where the future market is. So as I mentioned, when we have been guiding on revenues for Q3 and Q4, we do expect to do that reality will follow this path where rates are expected to be in the $200,000 plus at the end of the year. Another thing to note, we have mentioned this also in the past is the fact that a lot of the big players there, they have chartered-in ships on longer-term contracts. And there's really a few independent owners left in the spot market, which means that most of the fixtures, which there are a few of, but the ones being concluded is mostly of relets where people with -- or players, traders, portfolio players with the gap in the program or subletting our ships for shorter duration voyages, while independent owners are very limited involvement in the spot market these days. So another reason why we are a bit about the long-term outlook is new building prices, which have just keep on moving upwards. We are at around $260 million for new building prices for LNG carrier today, you are quite lucky if you managed to get still a ship for 2027. The window is now closing in on 2028 deliveries. So these ships that have this price tag for delivery of 2027, '28, those are the ones we are competing with. And in order to get a reasonable return on your capital when making such a big investment, you need higher rates. And that's where rates have gone. The 5-year time charter rate has stabilized at a very attractive level of around $135,000. But actually, to be fair, most people who are ordering ships at $260 million, they are not looking for 5-year time charters. They are looking for time charters of 10 years plus. So that's the one we are competing with, and that makes us upbeat about being able to extend our ships for longer duration at higher rates eventually when they come open, as we have demonstrated our ability to do also in the past. So if we look at the order book, it's huge and it's been -- keep ongoing. We have seen some slower activity on ordering given the lack of available slots and given where prices have been going. But a positive sign is at least that there's not a lot of speculative orders. Most of the ships, about 90% of the ships under construction are committed to long-term contracts. And as I mentioned here, you can see that the order book for 2028 now is already filling up. So if we look at the product markets, the installed capacity of LNG exports at the end of March was about 465 million tonnes, I -- we are not utilizing the full capacity. We do expect total export for 2023 to be around 415 million to 420 million tonnes. So there are some downtime on installed capacity. There is also a lot of capacity being constructed, especially in North America and then, of course, in Qatar, where they have a huge expansion. So if you look at the projects being under construction, and coming on stream near term, this volume goes up to $621 million. And we do expect more projects still to be sanctioned. So we are looking here at the market of, let's call it, around 770 million tonnes in 2030. And this growth of liquefaction capacity together with the phaseout of older steam tonnage is what is attracting demand for modern ships like we have in our portfolio. So that's it. I think we can then conclude by going through the highlights just shortly mentioned revenues in line with our guidance, $92.5 million. We had average time charter equivalent earnings of about $80,000 also in line with our guidance. This resulted in adjusted net income of $35.2 million or $0.66 per share. We have completed the balance sheet optimization program. It's been a process now going on for about one half year, where we refinanced all the 13 ships and boosting our cash balance, as I mentioned, at $475 million of cash at hand, at quarter end or $9 per share. We have started our drydocking schedule. Everything is going well. Both two force ships have been completed according to schedule and budget, and we are now planning for the two last dry dockings for the year or expected to take place in June. We are reaffirming our revenue guidance for the year, $370 million. Revenues next quarter will be a bit softer because of these dry dockings, but ships will be in operation, again, full capacity from Q3 where revenues are expected to pick up again. So with a good financial position and our big charter backlog. We are pleased to once again pay out $0.75 per share in dividends or $3.75 per share in the last 12 months, which I hope give our investors an attractive yield investing in Flex. So with that, I think we take a short break before we come back with our Q&A session where, as I mentioned, you can win our Flex on the beach summer kit. Thank you.

Okay, Knut. I think before we start with questions, maybe we can show the gift we have this time. This time, we have a summer team, as I mentioned, Flex on the beach, beach tower, together, of course, you need some protection with Flex on the Beach, Sunscreen or cap, of course. We have to include the isle of dividends T-shirt this time as well. And lastly, our sunglasses. So let's see who will win this nice summer package -- and I think we have a lot of questions today.

Yes. Thanks a lot for the questions coming in. There's a lot of questions, and we'll try to take them in order and sequence. But maybe we can start off a question forwarded from the investor Janne Harrington. She was on CNBC and put up a couple of questions, and they've been forwarded. Okay. So -- and that starts off with how does the low natural gas prices in the U.S. impact Flex LNG?

It's a complex question. That's a more answer than just one. It's short term and long term. Of course, in the long term, if prices for natural gas stays very low in U.S., of course, this will [indiscernible] new drilling activity, which is, of course, crucial in order to hold production up. This has not been a problem so far. We set new records all the time on U.S. gas production. And one of the reason is that wells are becoming more gaseous as you are drilling. But you need to have a sustainable return on equity on our capital in this project. So we don't really like that prices are this low. Of course, short term, is that means that exporting cargoes out of U.S. is very profitable because the price difference between U.S. gas prices and international gas prices are bigger, which means that those people exporting cargoes are making more money on LNG, and this is also the case actually on LPG. So it's a bit like the story about Goldilocks. You don't want it to be too hot. You don't want it to be too cold, so you need to find some kind of sweet spot. I think luckily, of course, most -- a lot of the wells, you're not really drilling for gas, some -- the wells you're also drilling for oil and the gas is just associated gas. So you also have to see it in connection with oil prices, which have been pretty firm. So as long as oil price is pretty firm, you will be drilling for oil and usually then you will find associated gas. But where you are looking for dry gas, you need probably to have higher prices in the U.S. than what you have had today. But keep in mind, gas prices in U.S. has also been quite volatile where there have been periods of time where people have been taking in also on selling gas domestically in the U.S.

And then it's a question on shipping, and shipping has historically been a volatile sector or there are different segments into it. But mentions that historically, investors have been burned on shipping companies. What's the difference with Flex? Does the charter agreements make it different than other shipping companies?

Of course, shipping has always been volatile. So it's a derivative of the global GDP and usually trade historically, at least, have been growing quicker than GDP. But this was also a problem on the downside when GDP growth slows less shipping activity. I think what makes Flex difference from most commodity shipping segments, is, of course, the fact that we have taken out a lot of this commercial risk by fixing our ships on long-term charters where we have very high level of earnings visibility. And this, you can also see earnings and revenues. So if you look at the revenue graph we're showing for the guidance for this year, there's various small changes in the revenues from one quarter to the next because of the stability. We have two long-term charters. And also actually, revenues are quite stable over the years, not only the quarters. So I think we are different in that regard because we have a bit different commercial strategy than most commodity shipping companies.

And that brings us into the dividend and how secure it is with the U.S. treasury yielding 5% is flex an alternative for people looking for higher yield?

Yes. [Sailors] have had a bad time since global financial crisis because, actually, they have had pretty bad the last 40 years or so because interest rate been going down and the yield you are getting on your savings become less and less -- more or less every year. Now the last year or so, it's been picking up, but real interest rate has been still been pretty low because of the high level of inflation. Yes, 5% is the short-term interest rate today. I don't -- but markets don't really think that yields will stay at this elevated level short term, while 1-year treasury yields is 4.8% today. 3-year is 4%. And then if you go all the way to 10 years, you are back to 3.5%. So I think if you are investing for income investing, what you're getting in a safe asset today. Let's see, we have a debt ceiling coming up [indiscernible], but it's a fairly safe investment tenure government bonds in the U.S. That gives you 3.5%. We are giving a much better return. As I mentioned, about 11% yield here the last 12 months based on the dividend. Of course, this dividend is also safe in the fact that we have no ships open this year. The earliest possible ship is next year where we have this 95% coverage if you assume options will not be exercised. We think it's more probable than not. And actually then the first open ship is 2027. So that gives us a very visible cash flow of income, which, as we have also said in the presentation, these earnings belong to the shareholder, and we are motivated to pay that out as dividend and that should give you a much better yield than what you are getting on government bonds these days.

So then let's turn to the questions on the market. What's your outlook for your LNG transport out of U.S. for 2023, 2024?

I think last quarter, our Q4 report, we had a graph on our projected supply situation for 2023. We are assuming 16 million tonnes of growth growing global exports going from 400 million to 416 million. And this might be a bit low when we see the EIA numbers. But half of that is U.S. So kind of the free port coming back on stream is most of this effect. And then the remaining growth is from rest of the world. 2024 will be a year where we will have very muted export growth. But then from '25 and onwards, there will be more exports. So that's why we feel it's been a good strategy for us to fix our ship in this window where global growth in exports will be low before this all takes off again from '25, '26, '27 onwards when our ships are coming up.

And we then look at the import regions. Last year and this year, there's been a lot of imports to Europe. Is Europe and EU an important market for Flex?

Yes. It's not really we who decide where the cargoes will be flowing. We charter auto ships on time charter. So the charter will then have the opportunity to trade the ship worldwide, including Europe, and they actually instruct us where the ship will be going. So we don't really have an impact on that. They are deciding where they find the best price for the cargoes. But of course, with all the Russian gas coming through pipelines, which has been shut down, this means that Europe has a large deficit of gas. And basically, what they have been doing now for the last year or so is to replace some of that Russian pipeline gas with LNG. Of course, there are not enough LNG to fill the whole gap, and that's why Europe needs to be a bit patient here until new LNG is coming on stream. And until that, you will have a pretty tight market where we have seen prices at a level which has been demand destructing. Right now, prices come down to more fairly normal levels, but expectations is for higher prices when we're coming into the peak winter seasons.

And now with LNG pricing, being more moderated. Have you seen Asia return to the import?

Yes. We've shown it in a couple of graphs here that we see some more growth from Asia. We do see this also in the routing of our ships. We see more ships going to Asia than have been the case recently. And of course, suddenly then when LNG in [indiscernible], let's call it, 20%, 25% discount to oil and coal prices are pretty elevated as well. That is stimulating demand. And I think it's stimulating demand at a good time also because inflation has been high in Europe because of the high gas prices with the energy prices coming down now that will put less pressure on the inflation. And of course, with China reflecting their economy having actually cheaper energy prices will probably help in the recovery of the Chinese economy as well.

Then we have a question from Mike [indiscernible] which goes more on the fleet and the steam tankers. It's a topic you've covered over the years. But it's been mentioned that this will be uncompetitive and scrapped and that has not materialized [yet].